Settlement affects credit - How to negotiate and restore your score

When you sign an agreement with your creditor regarding settling your unpaid bills, you'll be allowed to get rid of debt by paying up to a certain percentage of your outstanding balance. Usually, one goes for a settlement when he is facing hardship such as job loss, medical treatment etc. To settle your debts, either you negotiate with your creditors or seek help of a settlement company to do it on your behalf.

How does settlement influences your credit score?

When you settle debts, it leaves a negative scar on your credit report. That's because you may have missed payments prior to negotiating a debt settlement. Or, when you've enrolled in a settlement program, the negotiator may have asked you to stop paying your creditors till you've gathered enough funds for settling your accounts. Missed payments or stop payments affect your credit in a negative way thereby bringing down your score by 50 points or so.

As you go on settling your dues one by one, you'll receive a letter from your creditors stating that the debts have been paid back. Your creditors are likely to report the account status to the credit bureaus. Some of them may report a settled account as "Paid as settled" or "Debt settled for less than the full amount due".

What if your account is charged-off?

If one of your accounts is charged off or sent to collections, your account status will be reported as a "Charge-off" which has a negative impact on your credit score. Your creditor may continue to list its tradeline on your report for 7 years. However, you can request the CA (collection agency) to change the account status as "Paid charge off" or "Paid in full" when you pay the charge-off in full. However, if you settle the charged-off debt, your account status will be updated as "Settled charge-off". This will help to reduce the negative impact of a charge-off on your credit report.

What factors affect your credit score after settlement?

There are 4 factors that affect your score after you settle your accounts. These are:

Number of creditors reporting your account status as "Settled".
Number of accounts (on your credit report) showing positive activity.
Average age of your accounts.
History of late/missed payments on the settled accounts and other bills.

How can you negotiate and restore your credit?

When you work with creditors regarding the payments for settlement, try to negotiate a pay for delete agreement. Under this agreement, your account listing will be deleted from your credit report after settlement.

However, if your account is charged off and sent to collections, you may request the original creditor to pull it back from the CA and remove the charge-off from your credit report. Before you contact the creditor, decide upon how much you can pay in order to settle the account. The more you can afford and the faster you pay, the greater are your chances of having the charge-off removed.

When the creditor agrees to remove the charge-off, request him to give it in writing. Avoid making any payment towards the account till you get the agreement signed by your creditor. Once you've paid in full or settled the account with your creditor, check if the charge-off has been removed from your credit report. Prior to working out a settlement, negotiate with the creditor to report your account as "Paid in full" or "Paid as agreed". This will help to restore your credit after settlement. However, if you keep paying others bills on time, your credit score will get even better.

Last Updated on: Thu, 10 Dec 2015